Encyclopedia of Investment Terminology

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Call Option

A call option is a financial contract between a buyer and a seller of an option. The buyer has the right to buy an agreed quantity of a commodity or other financial instrument from the seller at the expiration of the call option. However the buyer is not obligated to purchase the instrument. On the other hand the seller is obligated to sell the instrument if the buyer decides to exercise his right to purchase.

The buyer of a call option is most likely to profit when the underlying instrumentís value is going up. Once the price of the underlying instrument is over the price at which the buyer agreed to buy the option, the option is said to be in the money.

Options may be bought on stocks, on futures on interest rates, and commodities.


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